Eight Key Trends Driving M&A in Agribusiness

Eight key trends driving M&A in Agribusiness 2 | Eight key trends driving M&A in Agribusiness Eight key trends driving M&A in Agribusiness | 3 Eight key trends driving M&A in Agribusiness

Agriculture remains arguably the world’s most important industry, employing 20 percent of the global workforce. The world’s growing population coupled with rising incomes have led to an increased demand for food, feed, ingredients, and associated goods and materials that will continue to rise well into the foreseeable future.

While the agriculture sector remains largely fragmented, it has been able to consolidate more and more into large, integrated operations. Irrespective of sector, size, and type of operations, numerous forces are reshaping the global agriculture industry, leading to a spate of new business models, consolidation, and thus, M&A activity.

For investors, this presents tremendous opportunity. But investing in agriculture is not easy. The value chain can be long and complex, markets can be volatile, competition intense, margins thin, and performance can hinge on a range of unpredictable factors, often in unfamiliar or developing geographies.

In this report, we have identified eight key trends that are shaping the global agriculture industry and driving M&A activity along the way. 4 | Eight key trends driving M&A in Agribusiness 1. Declining productivity gains

The Green Revolution transformed food production, techniques and technology that can do more with limited but those productivity gains have been slowing down resources, particularly water. In 2014, Mitsubishi offered and have come at large input US$1.4 billion for Norwegian costs. Productivity of major salmon farmer Cermaq ASA crop yields is now growing in a bid to create the world’s at half the rate of the 1960s second-largest salmon and 1970s, and opposition to Productivity of major crop farming business. By far, fish genetic modification in some yields is now growing at is the fastest growing source markets, most notably the EU, “ of protein, making farmed somewhat limits the scope for half the rate of the 1960s fish a much better way to further gains. and 1970s, and opposition secure food supply than fishing in the wild. At the same time climate to genetic modification change, population growth, in some markets, most Increasing yields in the EU large-scale agriculture, and without resorting to genetic competing industries have notably the EU, somewhat modification is another area meant that many areas simply limits the scope for further of activity, with Syngenta do not have enough quality acquiring Lantmännen’s water and land. To take just gains. winter wheat and winter one example, the US states oilseed rape businesses through which the Colorado River flows are legally in Germany and Poland, in 2014. The deal enables entitled to claim 1.4 trillion gallons more per year than“ Syngenta to develop better seeds in two of the EU’s the river actually produces. As a result, food and feed most important crops. products are a hotspot for M&A activity with new Eight key trends driving M&A in Agribusiness | 5 2. Urbanization

By 2020, more than half the world’s GDP growth is utilize their unused land for agriculture, but others, like expected to come from countries outside the OECD . China, are already using virtually all available land. In fact, As these countries are getting richer and more people in China available land is shrinking due to soil pollution. are moving to cities, their diets are changing too. With China had tripled agricultural production since 1961, increase in disposable income comes a higher adoption becoming a net grain exporter until 2007. But a rising of a ‘developed-nation’ diet with demand for meat (especially more calories, more processed pork), and soil degradation food, and more animal protein. has changed that. China now imports agricultural products In fact, to meet demand from There are abundant growth worth more than $115 billion a growing population with opportunities in supporting every year. changing tastes, global meat “ production will need to increase industries, such as breeding, There are abundant growth by 74 percent by 2050. The animal-health testing, feed, opportunities in supporting implications are beyond just industries, such as breeding, meeting new product demand. and vaccines. animal-health testing, feed, US-style feedlots require 7kg and vaccines. There is also of grain to produce 1kg of beef, and around 4kg of grain some potential in making feed conversion more efficient to produce 1kg of pork. The inputs required may vary on so that“ animals produce more meat for the same quantity the rearing method, but the implication is clear: more of feed, an area that could be profitable for companies farmland will be required to support a changing global with unique intellectual property in additives, such as diet. Already, 90 percent of global farmland is being used probiotics, enzymes, and acidifiers. for feed produce, not food for direct human consumption.

Many countries, such as Argentina and Brazil, can simply 6 | Eight key trends driving M&A in Agribusiness 3. Conscious consumers

Globally, consumers are more conscious about health Developing markets may not have the same taste for and sustainability extending to both diet –such as sustainable, fertilizer-free produce, but food quality gluten-free, organic – and environment. Although this is remains a major concern. In China, for example, a string primarily a developed-world phenomenon, these trends of scandals has undermined consumer confidence in are catching up in developing local production. This was the markets too. Governments reason behind investment firm are tightening food standards KKR’s decision to purchase and there is increased demand an 18 percent stake in Fujian for foods that are certified as We could be heading Sunner Development Co, sustainable or demonstrate a toward a future where China’s largest chicken breeder level of environmental/social “ and processor. The $400 million commitment. consumers will be able deal was specifically designed to set up a partnership that However, in a complex supply to scan an in-store item expands Sunner’s operations chain, it is difficult to provide and review its entire to provide safe, high-quality these blanket certifications. chicken for Chinese consumers. Cargill and McDonald’s recent life-cycle – from where pilot in Canada tracked 9,000 it was grown to what China also accounts for more cattle from birth to burger. This than 50 percent of global pork was a relatively small project products were used. consumption, yet large-scale and it still involved 181 different farms in the country provide operations, including 154 backgrounding operations (an just 1 percent of“ total domestic supply. Larger farms are intermediate stage of beef production) and 24 feedlots. expected to increase six-fold by 2020, not only due to better efficiency but also because of their higher quality But this is not a trend that will die out soon. In fact, Bayer standards. A case in point is China’s WH Group Limited’s CropScience predicts that we could be heading toward a ~$4.7 billion acquisition of US pork producer Smithfield. future where consumers will be able to scan an in-store A year after the acquisition, WH Group rebranded and item and review its entire life-cycle – from where it was sold products with the Smithfield name to cash in on grown to what products were used. Smithfield’s reputation for quality. Eight key trends driving M&A in Agribusiness | 7 4. Inefficient supply chains

Supply chains in many parts of the world are still does not already own of Dutch grain trader Nidera. This inefficient, with much of the food being wasted before expands Cofoco’s reach in Europe and Latin America, it reaches consumers. In Africa and Asia, as much as 30 allowing it to compete with global rivals, such as Cargill. percent of all food is wasted in this manner. In Western countries, an even higher proportion of food is wasted Even in 2012-2013, the food ingredient sector was because retailers overstock to particularly fragmented, ensure that shelves are always leading to opportunities for full, and because consumers are consolidation. Global food more wasteful than their Asian/ processing company, Archer African counterparts. By controlling the supply Daniels Midland Company, acquired food ingredients The balance of power in supply “chain it is possible to provider WILD Flavors for Euros chains around the world is weed out inefficiency, 2.2 billion. The desire for simpler shifting, with prices, being supply chains led to competing dictated not by producers but secure better prices and bids for Australia’s Warrnambool by supermarkets. In the UK for have greater control Cheese & Butter by Bega example, small, independent Cheese, Murray Goulburn and retailers dominated the market over sustainability and Canada’s Saputo (eventually won until the 1960s. But today, more traceability. by Saputo for $500 million) and than 90 percent of food sales are a 2013 joint venture between in supermarkets (75 percent in Louis Dreyfus Company, the the largest four chains alone). A similar trend is sweeping world’s“ biggest cotton merchant, and Namoi Cotton developing markets as wealthier consumers demand Co-operative to sell fiber from Australia. The deal gave more choice, and supermarkets expand to meet it. Louis Dreyfus access to around 50 percent of Australia’s cotton. Overseas investment in agriculture has moved from focusing on land acquisitions to encompassing the entire In the developing world, supply chains are an obvious supply chain, including processing, logistics, ports, and target for consolidation. The UN FAO provides the trading. By controlling the supply chain it is possible to example of domestic food processors in West Africa weed out inefficiency, secure better prices and have who prefer to import raw materials, such as fruit juice greater control over sustainability and traceability. concentrate, because local supply chains are too weak for a reliable supply. Often, the companies involved may For example, China’s state-owned COFCO announced be too small and the supply chains too fragmented to in August 2016 that it would purchase the 49 percent it make them a serious target for major M&A players. 8 | Eight key trends driving M&A in Agribusiness 5. Polarization: large vs. niche

The agricultural industry is currently split into two distinct camps: large, integrated firms at one end of the scale and specialized niche players at the other. Farms in Brazil can now top 100,000 acres for example, while Farming in much of the smallholders and family farms are coming together world is a relatively to form cooperatives that enable economies of scale “ when making purchases and provide more bargaining stable occupation due power over prices.

to generous subsidies, Cooperative type structures have several benefits meaning that deal flow in for growers and small producers, such as collective bargaining power and sharing of assets and equipment. the sector is limited: there In many countries cooperatives are actively encouraged is simply little incentive by the government as a way to increase productivity. In the Philippines for example, cooperatives in to sell. That is beginning agribusiness form a central part of the national to change as third or development plans.

fourth generation family From an M&A perspective, however, opportunities are members take control limited as cooperatives are voluntary associations that typically cannot be acquired. But this characteristic and are more open to is what also makes it difficult for cooperatives to strategies other than raise capital – leading some to explore alternative retaining full control. capital structures such as raising equity from external “ investors, which may present M&A opportunities. Eight key trends driving M&A in Agribusiness | 9 5. Polarization: Large vs. niche

We see several such instances in Australia, where ABB Meanwhile, European regulators were considering a Grain, Warrnambool Cheese & Butter and SunRice $43 billion bid by Chinese state-owned ChemChina for all corporatized and quickly became targets of M&A. Swiss company Syngenta, a deal that has already been ABB Grain was subsequently merged with AusBulk, approved in the US. If this deal goes through, it will be Warrnambool was acquired by Saputom and SunRice the largest foreign acquisition by a Chinese company was bought by Spain’s Ebro Foods. giving China access to a range of genetically modified seeds. This would not only allow it to compete with Farming in much of the world is a relatively stable global rivals such as Monsanto, but would offer the occupation due to generous subsidies, meaning that possibility of significantly raising crop yields in China. deal flow in the sector is limited: there is simply little Syngenta agreed to the takeover bid after rejecting a incentive to sell. That is beginning to change as third or $46.5 billion offer a year earlier from Monsanto. fourth generation family members take control and are more open to strategies other than retaining full control. M&A deals have also been driven by the desire to That opens the door to outside investment as well as enter the fast-growing agricultural chemicals (agrichem) expansion into other related operations like distribution market, such as a proposed takeover of Monsanto by or processing. There is also a surge in capital in the Bayer, which at $66 billion would be the largest deal sector as farmland is seen as an increasingly attractive so far in 2016. Bayer already has some biotech and investment. Agriculture funds raised almost $4 billion in agrichem, but access to Monsanto’s crop chemicals and 2015 alone . seeds would allow it to enter new markets.

Large companies, on the other hand are looking to expand In 2016 South Korean chemical company LG Chem also their global footprint via significant M&A activity. At the entered the agrichemical industry; it’s core petrochemical time of writing, regulators were considering a proposed business having slowed considerably, entering the $130 billion merger between Dow and DuPont, which buoyant agrichem market offers it an opportunity for would control 25 percent of global commercial seed sales expansion. and 16 percent of world pesticide sales. 10 | Eight key trends driving M&A in Agribusiness 6. Price volatility

Commodity prices in general have been volatile in recent by attempting to diversify – such as US food processor years, and agribusiness has and commodities trader not been an exception. Price Archer Daniels Midland volatility has been increased (ADM), which paid $170 by the rise of biofuels, million in 2014 for Specialty which tend to reduce Price volatility has been increased Commodities, a distributor the amount of farmland of health foods such as available for agricultural “by the rise of biofuels, which nuts, seeds and fashionable crops. Food prices also tend to reduce the amount of ancient grains like quinoa tend to roughly track oil and chia. The deal increases prices, which have fallen farmland available for agricultural ADM’s exposure to markets dramatically in recent years. crops. Food prices also tend to deemed higher margin than That, combined with good bulk grains. wheat and rice harvests, led roughly track oil prices, which to a 5.2 percent fall in the have fallen dramatically in recent It has also led companies UN FAO’s Food Price Index to attempt to move up in September 2015, the years. the value chain through sharpest decline in almost acquisitions, such as seven years. ingredients manufacturer “ Ingredion that bought Penford Corp for $340 million in For producers specialized in one area, this can prove 2014. The deal allows Ingredion to take advantage of challenging, particularly as risks from climate change and the growing demand for the nature-based additives that civil strife appear set to continue. Some have responded Penford manufactures. Eight key trends driving M&A in Agribusiness | 11 7. Big data

Data has the potential to reshape agribusiness by sensors, big data and cloud services spill out of Silicon combining information on weather and prices with real- Valley and into other industries. Despite being a relatively time conditions in the fields. But it is a long way from young field there have already been some major realizing its full potential, partly acquisitions, such as Monsanto’s due to the fragmented nature 2013 purchase of The Climate of supply chain: data may be Corporation, which examines captured by multiple players at data on weather, soil and fields different stages but integrating Data has the potential to provide insights to farmers. them in a commercially to reshape agribusiness, The $930 million deal gives meaningful way is still a “ Monsanto access to technology challenge. combining information on which can monitor and predict weather and prices with problems in individual fields, In developing markets the potentially boosting yields. data may not exist in the real-time conditions in the first place, though the falling fields. Agricultural equipment maker cost of technology and rising John Deere is currently awaiting smartphone penetration may regulatory approval to purchase help to address this. “The Climate Corporation’s hardware division. Both companies produce equipment that plants seeds at high Ag-tech is becoming increasingly competitive as speed and at the optimum depth based on a variety of technologies such as satellite imagery, drones, remote factors.

Ag-tech is becoming increasingly competitive “as technologies such as satellite imagery, drones, remote sensors, big data and cloud services spill out of Silicon Valley and into other industries. “ 12 | Eight key trends driving M&A in Agribusiness 8. Food security

Agriculture is an intensely political subject, with of the country’s largest agribusiness, Graincorp. The protectionism and concern over availability often decision was linked to Graincorp’s ownership of critical trumping economics. The international competition for infrastructure, but there were also concerns that the deal food security can sometimes be overhyped: despite the could undermine public confidence in foreign investments. headlines about wealthier nations grabbing farmland in In July 2016, ADM tried to sell its remaining 19.85 the developing world, its impact is relatively small. China’s percent stake in Graincorp, with media reports citing Development Research Centre for example estimates that the government’s rejection of a bid by Chinese company of the 50 million hectares of overseas land used to grow Shanghai Pengxin to buy S Kidman & Co, a cattle station the country’s imports of edible oils and oilseeds, just 1 company, as proof that the new government was not as percent is actually cultivated by Chinese companies. open to foreign agricultural ownership.

Nevertheless, food security will remain a significant Faced with limited scope to increase domestic supply, factor in M&A activity. Broadly Chinese President Xi Jinping speaking, food security falls into has pushed for outward foreign two areas: direct investment (FDI) in a. boosting domestic production agriculture as a national food to provide self-reliance The desire for food security security strategy. The situation b. securing land or imports from can prevent as well as is even more urgent in the Gulf overseas. “ states, which rely on imports drive M&A activity. for as much as 90 percent Different nations are looking to of their food. They appear to expand domestic production have switched their focus from via different means. Russia plans to invest $11 billion to greenfield investments“ in Africa to buying established expand domestic agricultural industries over the next producers in more developed markets. five years with a third of this directed at meat producers. China’s purchase of Swiss agricultural company Syngenta, A combination of poor infrastructure and local hostility on the other hand, aims to ensure that it can feed its means that much of the multi-billion dollar investment still-growing population. China is home to 19 percent in Africa never materialized, leading to a search for of the global population but just 8 percent of its arable opportunities elsewhere. In 2012 the UAE’s Al Dahra paid land. Where many developing countries have turned over $400 million for eight agricultural companies in Serbia. more land to farming, in China not only is there little land And in 2013 a consortium of Saudi groups – dairy giant left, soil pollution has resulted in the shirking of available Almarai, grain importer Al Rajhi and Salic, the agriculture farmlands. arm of the country’s Public Investment Fund sovereign wealth fund – bought Continental Farmers Group, which The desire for food security can prevent as well as drive operates in Poland and Ukraine, for approximately $78 M&A activity. For example, the Australian government million, a hefty premium over its share price. vetoed a bid by US grain trader ADM to take control Eight key trends driving M&A in Agribusiness | 13 Conclusion

Agriculture is one of very few industries which affects every person on the planet. With a growing population, changing climate and increased demand for a Western-style diet, agriculture faces some clear challenges. In short, it has to do more with less. For much of the 20th century, the agricultural value chain was relatively obscure compared to many other industries. As that changes, it is more important now to understand the forces reshaping the sector. The trends outlined in this report are predictable: populations will continue to grow, and tastes will continue to change. But others are harder to predict.

Climate change is leading to unprecedented weather patterns, many regions continue to suffer economic and political instability, and technology could well disrupt the agricultural sector as it has so many others that had been too slow to adapt.

Some of the acquisitions currently awaiting regulatory approval are enormous, and how successful they are remains to be seen. But one thing is for certain: in terms of M&A activity, and quite possibly change in general, the current century promises to be a much more interesting one for agriculture than the last. 14 | Eight key trends driving M&A in Agribusiness

% Equity Ann. Date Target Business Country Buyer Country Seller Logic Behind The Deal sought value In Anti-Trust Approval Syngenta SG Switzerland China National Chemical Corp China Syngenta SG N/A 43,000 Strategic acquisition to build seed giant. U.S. security hurdles overcome. Deal expected by the end of the year. In Anti-Trust Approval Dow AgroSciences & U.S. Dow AgroSciences & DuPont N/A N/A N/A Merger designed to create $130 billion market cap seed and DuPont Crop Protection Crop Protection crop portection business giant - anti-trust decision expected February 2017 Oct 16 M.P.Evans Group UK Kuala Lumpur Kepong Berhad Malaysia Listed (JPMorgan Asset Management (UK), FIL Investment 100% 434 Expansion of listed Malaysia-based company's production Services (UK), FIL Limited, Alcatel Bell NV, Pension Arm, and processing of palm products and natural rubber. James Sharp & Co., Asset Management Arm) Oct 16 China Shengmu Organic Hong Kong Inner Mongolia Yili Industrial China Listed (Sequoia Capital China, Hwabao Trust Co., Ltd., 37% 1,840 Expansion of China-based company's dairy products Milk Limited Group Co., Ltd Sequoia Capital 2010, L.P., Greenbelt Global Limited, Kuanjie processing business. (Cayman) Investment Center LP) Sept 16 Potash Corp. of Canada Potash Corp. of Saskatchewan Canada N/A N/A N/A With revenues of around $36 billion, created the largest Saskatchewan Inc. & Inc. & Agrium Inc. crop nutrient supplier in the world. Agrium Inc. Sept 16 Monsanto Company U.S. Bayer AG Germany Listed (The Vanguard Group, Inc., Goldman, Sachs & Co., 100% 56,010 The biggest takeover of any business in 2016 to date. Glenview Capital Management, LLC, Capital World Investors, Immense seed and crop protection cost savings and market JPMorgan Chase Bank, N.A. Merkezi Columbus, Ohio - leadership. Istanbul Turkiye Subesi) Jun 16 Glencore Agricultural Switzerland Canada Pension Plan Canada Glencore plc 40% 6,255 Investment fund investment in Switzerland-based integrated Products Investment Board (40%) grain and oilseed business of Glencore plc. Jun 16 HAVFISK Norway Leroy Seafood Group Norway Aker Capital, Fausken Invest 63.2% 374 Expansion of Norway-based harvester, producer and retailer of seafood products May 16 The North Australian Australia QIC Limited Australia M.P.Evans Group 80% 230 Fund investment in Australia-based beef-cattle company that Pastoral Company operates cattle stations Apr 16 Fiagril Brazil Hunan Dakang International China Fiagril Participacoes SA 57.6% 347 China-based animal husbandry business expansion into Food and Agriculture Brazilian agricultural products and services, and biodiesel production and sales market. Apr 16 Illovo Sugar South Africa Associated British Foods UK Listed (Investec Asset Management Limited, Public 48.7% 771 UK-based food, ingredients and retail group investment in Investment Corporation Limited, Kagiso Asset Management listed South African sugar producer and manufacturer of (Pty) Limited, Allan Gray Limited) downstream products. Mar 16 GMG Global Singapore Halcyon Agri Corporation Singapore Listed (CIMB Securities (Singapore) Pte Ltd., Maybank Kim 100% 381 Expansion of Singapore-based producer and merchandiser of Eng Securities Pte. Ltd., OCBC Securities Private Limited, natural rubber products. HSBC (Singapore) Nominees Pte Ltd., DBS Nominees Pte. Ltd., Nomura Singapore Limited, Sinochem International (Overseas) Pte. Ltd., UOB Kay Hian Private Limited, Phillip Securities Pte Ltd., DBSN Services Pte. Ltd., BNP Paribas Nominees Singapore Pte. Ltd., Citibank Nominees Singapore Pte. Ltd., GMG Holding (HK) Ltd., Panwell (Pte) Ltd., Raffles Nominees (Pte.) Ltd., DBS Vickers Securities (Singapore) Pte. Ltd., Investment Arm, DB Nominees (Singapore) Pte Ltd, Bank of Singapore Nominees Pte Ltd.)

Mar 16 Halcyon Agri Corporation Singapore Sinochem International China Listed (Clear Tower Investments Limited) 67.3% 333 Expansion of natural rubber divivion of China-based company Corporation engaged in the logistics, industrial investment and trade of chemical raw materials and agricultural chemicals, rubber products and metallurgy products. Jan 16 China Shengmu Organic Hong Kong Nong You China World Shining Investment Limited 19% 1,803 Expansion of China-based investment holding company with Milk interests in companies engaged in dairy farming business and milk business. Dec 15 Tereos Internacional Brazil Tereos Participations France Listed 30.2% 281 France-based investment holding company expansion of interests in companies engaged in producing cereal and sugar. Nov 15 Advanta India UPL India Listed (Venus Capital Management, Inc., Warburg Invest 51.6% 695 Diversification of India-based agro- and industrial chemicals Kapitalanlagegesellschaft mbH, Tree Line Advisors (Hong company the development, production and distribution of Kong) Ltd., Archana Overseas Private Limited, Sun Global hybrid agricultural field crop seeds and plant seeds. Investments Limited, New Leaina Investments Limited) Nov 15 Kulim (Malaysia) Malaysia Johor Corporation Malaysia Listed 44.3% 1,172 Expansion of Malaysia-based company palm oil, healthcare and property business. Aug 15 Olam International Singapore Mitsubishi Japan Temasek 12.0% 5,431 Japan-based diversified conglomerate's expansion into the sourcing, processing, packaging, and merchandising of agricultural products. Eight key trends driving M&A in Agribusiness | 15

Satyanarayan Ramamurthy Head, Global Strategy Group KPMG in Singapore T: +65 6213 2060 E: [email protected]

Chris de Lavigne Principal, Global Strategy Group Agribusiness & Chemicals T: +65 6213 3419 E: [email protected]

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